A white picket fence around a half-acre of perfectly curated lawn is the American dream. Better yet, if there happens to be a house on that lawn. This dream turned into a nightmare for many Americans during the 2008 financial crisis. Eight years later, potential homeowners are still wary of the market. It may not be time to jump into a mortgage just yet, but it is time to stop running in the opposite direction. Historically low interest rates and rising rents mean that many renters would be better off trading in their landlord for a piece of the American dream.
Here are a few key elements of homeownership to help you begin thinking about whether you should buy a house this year.
Every year, scores of Americans pay for housing in the rental market. In a very real sense, they are making monthly payments towards someone else’s mortgage. You might make more money investing (and continuing to rent) when compared to the cost of homeownership. However, the planning, self-control and follow-through of a rigid savings and investment strategy is a lot more challenging than saving for a down payment and turning throw-away rent money into equity for yourself instead. It’s hardly a surprise that the median net worth of homeowners is more than $170,000, while non-homeowners average just over $5,000 in net worth.
There are a few key things to understand about mortgages before signing the dotted line. Usually, the interest on your mortgage is frontloaded. This means that you will be paying your lender before you really begin building equity for yourself. (On the other hand, the interest is tax-deductible!) When calculating your expected equity in a property, you need to take into account both the principal loan balance and the cumulative interest on this loan. If opting for a flexible mortgage rate, plan for your rate to fluctuate upwards after your fixed-rate term ends. Taking out a mortgage has enough associated costs that it is not generally recommended for buyers who aren’t fairly stable in their employment, location, and chosen living partner.
The importance of interest rates
We mentioned historically low interest rates, but what does that really mean? It means that your loan will cost less. It is worth noting that your specific interest rate will vary with factors such as your credit score and down payment amount. If you have poor credit or haven’t managed to save a sizable chunk of cash, you may be better off waiting. However, if you are ready right now, you are likely to get one of the best rates in recent history. In the future, who knows?
Hidden costs of homeownership
You’ve done the math. You’re excited about buying. Before scouring the neighborhood for real estate signs, take out the calculator one last time. Even if you have the down payment sorted and your monthly mortgage payments add up to less than your current rent, you should incorporate less obvious costs. You can expect to pay closing fees, property taxes and insurance. On top of this, basic maintenance costs can soar well beyond what renters might imagine, usually about one percent of the home’s sale price every year, on average. On the flip side, government incentives for homeownership offset these costs. The New York Times has a great online calculator to compare the cost of renting with buying given a plethora of factors.
Some factors don’t come with a price tag. Buyers also should consider lifestyle costs. Many urbanites, for example, are effectively priced out of city living when they look to buy. Trading in a centrally located apartment for a home of your own in the suburbs may incur subjective costs that no dollar amount can justify.
What can go wrong?
Home ownership can seem straightforward. Save for a down payment, choose a mortgage and watch your equity grow. What could go wrong? Answer: an awful lot. First and foremost, your home may lose value. Suddenly your mortgage is much higher than the value of your home. No need to panic quite yet. What goes down can come back up. This coupled with a loss of income or a sudden need to sell, however, can spell disaster. To temper risks associated with homeownership, buy within your means and only purchase from a place of personal and professional stability. Buyers should make sure that they could still fulfill mortgage commitments even under the worst-case scenario.
Whither the housing market?
A key component of whether to buy a home in 2016 is market projections. Home prices are on the rise now, but counting on a bull market can land buyers in a heap of trouble. As millennials begin to test the waters of homeownership, expect demand to increase. As baby boomers face retirement and find all their assets locked in illiquid homes, expect supply to increase, too. Any number of other factors will also impact the housing market.For a good number of people, excellent market conditions don’t matter. Neither does good luck. They simply aren’t making enough money to buy much of anything, much less the American dream. Young people saddled with student loan debt and older Americans whose finances and credit were destroyed by the 2008 crisis find themselves renting despite a desire to buy. Rising rental costs then become just one more impediment to savings and, ultimately, buying a home.